Note on the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)

Abstract

In 2005, new legislation was passed by the U.S. Congress and signed into law by the President that introduced a number of major amendments to U.S. bankruptcy law, affecting both business and consumer bankruptcies. This legislation, called the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), became effective on October 17, 2005. This note summarizes key provisions of the new law that affect business bankruptcy reorganization under Chapter 11 of the U.S. Bankruptcy Code, contrasting these provisions with corresponding provisions in the old law.

The June 2013 bankruptcy of Detroit, Michigan, was, at the time, the largest municipal bankruptcy in American history. Detroit had struggled for years with a weakening tax base, high unemployment, a heavy debt load, and increasing retiree costs. These financial strains led to cuts in basic public services, declines in population, and significant urban blight. The State of Michigan appointed an emergency manager, Kevyn Orr, to lead the city though the restructuring process. In March 2014, Orr and his team put forth a restructuring plan to the city's creditors that provided for needed reinvestment in city services, but low recoveries for unsecured creditors. The city's plan also proposed that the Detroit Art Collection be transferred to a trust funded by philanthropists, with the proceeds accruing solely to retirees rather than to all creditors. Orr and his team must now find consensus on a plan that meets the needs of Detroit and is acceptable to its creditors.

In 2016, electric car manufacturer Tesla announced that it was making an offer to acquire solar panel manufacturer SolarCity in an all-stock offer worth $2.6 billion in Tesla stock. Tesla’s co-founder and CEO, Elon Musk, believed that the merger would generate significant cost and revenue synergies, based on his vision of the future of transportation, energy storage, and a “green" economy. However, most Wall Street analysts were highly skeptical of the deal, voicing concerns that the merger would burden Tesla with excessive debt, and that Musk was using the deal to advance his personal interests (at the expense of public shareholders) and bail out Tesla. Concerns were raised over possible conflicts of interest, given that Musk owned over 20% of the stock, and sat on the board of directors, of both companies. The viability of the merger was also questioned given that neither Tesla nor SolarCity had ever been profitable.